Shares of NXP Semiconductors (NASDAQ:NXPI) are setting fresh 52-week record highs on a daily basis. The stock traded mostly sideways throughout 2012, but shot up like a rocket in December and hasn't looked back. NXP investors have gained a 33% return on their investment in the last three months alone.
The back story
The Dutch semiconductor designer enjoyed a similar rally two years ago, when its market-leading position in the near-field communications arena looked like a gold mine. At the time, Google (NASDAQ:GOOGL) announced NFC support in the Android mobile platform coupled with a phone-based payment service. Rumor had it that Apple (NASDAQ:AAPL) wouldn't be far behind with similar announcements. NFC-based payments and phone-to-phone communications looked like the next big thing, and NXP had a stranglehold on the market for NFC chips.
But the story fell apart in 2011. I dare you to find a real-world use for Google's Wallet service even now. Apple still hasn't enabled NFC functions in iPhones or iPads. Long story short, that guaranteed revolution didn't work out as quickly as some investors had hoped.
But NFC is back to driving NXP's performance again. The technology still accounts for a rather small portion of the company's total sales, but it is still a rapid-growth product.
NFC products fall under NXP's emerging ID operations. In the recently reported fourth quarter, that division tripled revenue year over year and is on track for about $280 million in 2013 sales. That's a tiny fraction of NXP's $4.4 billion in annual sales, but at growth rates like these, it won't be long before the contribution starts to matter. That's why analysts and investors are catching NFC fever again.
More competition, more problems?
CFO Peter Kelly noted that major chip designer Broadcom (UNKNOWN:BRCM.DL) recently released competing NFC chips and might make inroads in his own company's stronghold accounts. But that's not a disaster in Kelly's view. He sees the increased competition as a sign that the market will enter an explosive growth phase as it matures.
"We actually expected Broadcom to come in actually a little sooner than they did. I think it was more of an effort to expand the customer base or the supply base, if you will, not so much something that was a shortcoming on our products," Kelly said at a recent technology conference.
That's not to say that NXP lives and dies by NFC growth alone. The core ID segment, which includes identification products for less flashy markets like government-issued ID cards and electronic toll booth collections, grew sales by 56% in the fourth quarter. That's a billion-dollar annual business already. That combination of high growth and large revenue base is nothing to sneeze at.
NXP is a mobility play again, and investors are getting excited about the growth story. This Rule Breaker and five-star CAPS stock (out of five) has earned its Foolish stripes.